(in thousands $US) ASSETS 2001 2002 2003 Cash and Cash Equivalents 6,900 7,300 7
ID: 2663439 • Letter: #
Question
(in thousands $US)ASSETS
2001 2002 2003
Cash and Cash Equivalents 6,900 7,300 7,800
Accounts Receivable 7,000 7,400 7,900
Inventories 47,000 51,000 54,000
Prepaid Expenses 6,500 6,800 7,000
Deferred Income Taxes 6,300 6,700 7,200
Total Current Assets 73,700 79,200 83,900
Property, Plant & Equip. 69,000 72,000 77,000
Intangible Assets 21,000 22,500 24,000
Total Assets 163,700 173,700 184,900
LIABILITIES AND EQUITY
Current Portion of Long-term Debt 1,200 1,300 1,450
Accounts Payable 27,000 29,500 33,000
Other Current Liabilities 6,000 6,300 7,500
Total Current Liabilities 34,200 37,100 41,950
Long-term Debt 3,000 3,100 3,400
Other Long-term Liabilities 5,000 6,000 7,000
Total Liabilites 42,200 46,200 52,350
Equity 121,500 127,500 132,550
Explanation / Answer
The formula for calculating the working capital is Working Capital = Current assets - Current liabilities In 2001: Working capital = $73,700 - $34,200 = $39,500 In 2002:] Working capital = $79,200 - $37,100 = $42,100 In 2003: Working capital = $83,900 - $41,950 = $41,950 Therefore, the working capital is more in the year 2002. The formula for calculating the current ratio is Current ratio = (Current assets - Current liabilities) / Current assets In 2001: Current ratio = ($73,700 - $34,200) / $73,700 = $39,500 / $73,700 = 0.536 In 2002: Current ratio = $42,100 / $79,200 = 0.53 In 2003: Current ratio = $41,950 / $83,900 = 0.5 The current ratio is almost one and the same in all the three years. The short term debt in high in the 2003 with $1450 and the long-term dent is also high in the year 2003 with $3,400. Based on the above calculated ratios, the working capital ratio is important because it represents the funds available with the company for day-to-day operations. Working capital finances the cash conversion cycle. Negative working capital represents the company has no funds for day to day operations. Short-term funding is imporatant because the company has already long-term funding in place and still needs short-term funding to operate. Without short-term funding the company will go bankrupt. A current ratio is also important because it is the liquidity ratio that measures the company's ability to pay the short-term obligations. The higher the current ratio, the more the company is capable in paying the short-term liabilities. Though company maintaind constant ratio in all the three years, but still it has low ratio which indicates that the company is unable to pay off its short -term obligations. Therefore, the company should should measure its financial health in terms of paying its short term and long term obligations.
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